Fighting the Last Monetary War

In 1896, Williams Jennings Bryan captured the Democratic nomination for the presidency with a rousing speech that ended with a theatrical challenge to advocates of the gold standard: "You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

The United States had adopted a gold standard 20 years earlier, and the supply of gold had not been keeping pace with the rate of economic growth. The result was deflation at an annual rate of 1.7 percent a year. This was particularly hard on farmers, many of whom had mortgages that got harder to pay off as dollars appreciated.

Bryan was calling for a return to the bimetallic monetary standard that had prevailed before the Civil War. Under a bimetallic standard, the government converts either silver or gold into dollars at specified rates. The value of silver had fallen dramatically relative to gold, so Bryan's call for the "free coinage of silver" was essentially a call for inflationary monetary policy.

Bryan's gold-standard-supporting opponent, William McKinley, won the election, and the United States stayed on the gold standard for another four decades. But while the US formally retained its tight-money policy, an improvement in mining technology sharply increased the gold supply, producing de facto easy money. Prices rose, rather than falling, for the next two decades.

The expansion of the gold supply ended the deflation — and Bryan's presidential aspirations — and, ironically, cemented the establishment view that the gold standard was essential for monetary stability. The US stayed on the gold standard until the early 1930s, when the United States (and other countries) experienced a severe deflation that helped trigger the Great Depression. President Franklin Roosevelt made the controversial decision to go off the gold standard, allowing a more expansionary monetary policy that many economists credit with spurring a recovery.

The Great Depression toppled the old orthodoxy of the gold standard and tight money. It was replaced by a new orthodoxy, summarized by the Phillips Curve, that held that governments face a trade-off between inflation and unemployment. It was widely believed that a bit of inflation was a small price to pay to keep people employed and to ward off another Great Depression. This worked pretty well for the first couple of decades after World War II, but the Federal Reserve started to overdo it in the late 1960s. In the 1970s, the US started to experience high inflation and high unemployment, something the Phillips Curve suggested should be impossible.

I think that a return to a monetary system based on physical resources is not something that our government and international banking cartel will ever support. On the other hand, there is little chance of fixing our current system before it completely collapses, so a barter or gold/silver based system may rise up on it's own to fill the void in a natural transition.

When the banks own all the wealth, will anyone even care? You have all the money, good for you. It's like winning at Monopoly; once you win, the game is over. You're left with a sense of accomplishment, but nothing to show for it, since those little pieces of paper are worth nothing to anyone else at that point.

Fighting the Last Monetary War | Timothy B. Lee | Cato Institute: Commentary